This document provides an overview of consumer behavior theory, including definitions of utility, total utility, and marginal utility. It discusses how utilities can be measured ordinally or cardinally. The law of diminishing marginal utility is also explained, with an example of how the marginal utility of drinking glasses of water decreases as thirst is satisfied. Exceptions to the law and its importance are noted. Graphs and schedules are provided to illustrate the concepts of total utility, marginal utility, and their relationship.

1. Dhaka
City
College
Submitted To :
MD. Abul Khayer
Lecturer of Economics
DHAKA CITY COLLEGE
Submisson Date :
February 25,2018
Department of
Computer Scince
& Engineering
Assignment on :
“Theory of Consumer Behavior”
Submitted By :
MD. Meharab Latif (124)
HIMU(118)
NASIM(131)
OVII(121)
ARIN(75)
AKASH(119)
SIPON(122)
Section : B Class : CSE
Session : 2015-16
4th semester,2018
Group Name :
OBOSSHOI

2. Consumer of Behavior :

3. Consumer of Behaviour
UTILITY :
Economics analyses consumer behavior by using the basic term
“Utility”.The word “Utility” means satisfaction. When a consumer
consumes a commodity, he gets satisfaction. That is known as
Utility.
So that, it refers to how consumers rank different goods and
services.
Different economists define about utility according their own view.
● According to Mccollen & Brue – “Utility is want satisfying
power”.
● According to P.A. Samuelson- “Utility is a scientific construct that
economists use to understand how rational consumers divide their limited
resources among the commodities that provide them with satisfaction””.

4. For example: A consumer eats three times of orange and his total
utility is 24 units. At the fourth time, when he eats one more orange,
his satisfaction has become 28. Then his marginal utility is 28-42=4
units.
0
1
2
3
4
5
6
0 1 2 3 4 5 6
Y-Values
Y-Values

5. From the figure X axis measures unit of commodity and Y axis
measures level of utility
From the first unit of commodity, consumer gets five units of
utility. That can be measured as point a.
After consuming 1st,2nd and 3rd commodity, his level of utility
respectively 5,4,3 that indicates by point a, b and c.
and so on.
As the level of utility and unit of commodity are negatively
related, that’s why the curve is downward slopping.
we can also see the relationship of commodity and utility from
schedule.
where for the commodity 1,2,3,4,5 the utilities are 5,4,3,2,1
that indecates the negetive relationship of commodity and
utility
the scheudle are given below :

6. Schedule :
Units of commodity Units of utility
1 5
2 4
3 3
4 2
5 1

7. Mesurment Of Utility
Ordinal Mesurment of
Utility
Cardinal Mesurment
of Utility
Types of Utility :
Utility can be classified into two different types. They are -
i. Total Utility.
ii. Marginal Utility.
i. Total Utility : Total Utility refers to total satisfaction that a
consumer gets from consuming different unit of a commodity at a
certain time period.

8. If a consumer consumes a certain commodity again and
again during given time period, he will get different level of
utility. By summing up the different level of utility, he will
get total utility.
For example : A consumer eats three times of orange and
he gets different level of utility. Such as - 10, 8 and 6. Then
his total utility is equal to 24 units.
We can calculate total utility by using the following
formula -
TU = MU1 + MU2 + MU3 + ..... + MUn
= ∑ MU
Here, TU = Total Utility
MU = Marginal Utility
∑ = Summation
That is total utility is the sum of marginal utility.

9. ii. Marginal Utility : The word "Marginal" means extra or excess.
When a consumer consumes extra unit of commodity, he gets
extra satisfaction. That is known as marginal utility.
According to professor Lipsey - "Marginal Utility refers
to the change in satisfaction resulting from
consuming a little more or little less of that
commodity."
For example :
Units of
commodfity
Total utility Merfginal Utility
1 10 10
2 18 8
3 24 6
4 28 4
5 28 0
6 24 -4
Units of
commodfity
Total utility Merginal Utility
1 10 10
2 18 8
3 24 6
4 28 4
5 28 0
6 24 -4

10. consumer eats three times of orange and his total utility is 24
units. At the fourth time, when he eats one more orange, his
satisfaction has become 28. Then his marginal utility is (28-24)
= 4 units.
We can calculate marginal utility by using the following
formula –
MU = TU/ Q
That is marginal utility is equal to change in total utility divided
by change in quantity.
# The relation between total utility and
marginal utility :
We use a table for showing the relationship between total
utility and marginal utility.

11. ▲TU
MU = ——
▲Q
TU2 – TU1
=
Q2 – Q1

12. The second column from the table we find that total
utility increase at a decreasing rate.
From the table for consuming first to fourth unit of
commodity the marginal utility is positive. That's why
total utility is positive.
When marginal utility is zero then total utility become
maximum. At fifth units of commodity consumption
MU = 0 and TU = 20 units, that is maximum.
When marginal utility is negative then total utility
decreases. That is a sixth unit marginal utility is -2
that indicates dissatisfaction. Then total utility
diminishes 20 to 18 units.
In such a way we find different relations between total
utility and marginal utility.
Now we show this relation graphically -

13. 1, 10
2, 18
3, 24
4, 28 5, 28
6, 24
0
5
10
15
20
25
30
0 1 2 3 4 5 6 7
Total Utility
1, 10
2, 8
3, 6
4, 4
5, 0
6, -4
-6
-4
-2
0
2
4
6
8
10
12
0 1 2 3 4 5 6 7
Mefrfginal Utility

14. Above the TU curve figure X-axis measured unit of commodity and Y-
axis measured total utility. As per units of a commodity are fixed
that's why we divide X-axis in the same unit. That is 1,2,3,4,5...... At
first unit total utility is 10 units that indicate by point A. After
consuming 2nd, 3rd, 4th, 5th and 6th unit of commodity, total utility
increases 10,18,24,28 units that measured by the different point
B,C,D,E,F. At 7th unit of commodity consumption, total utility
diminishes 30 to 28 units that indicated by point G. By adding up
A,B,C,D,E,F,G we get total utility curve.
Above the MU curve figure X-axis measured the quantity of
commodity which is divisible by same unit from 1 to 7th unit and Y-
axis measured marginal utility. At first unit of commodity
consumption, the level of MU is 10 at point A´. After consuming
same commodity respectively 2,3,4,5,6 unit, the MU become 8,6,4,2,0
units that measured by point B´,C´,D´,E´,F´. At the 7th unit of
commodity consumption, Marginal utility become negative that is
indicated by point G´. Now adding all the points A´, B´,C´,D´,E´,F´,G´ we
get downward sloping marginal utility curve.

15. From the figure we find that at sixth unit where
marginal utility is zero, total utility is maximum.
Before that as marginal utility is positive, that's why
total utility increase at a decreasing rate.
After the sixth unit when marginal utility is negative
then total utility diminishes. There is the relation
between total utility and marginal utility.
Measurement of utility:
Utility can be measured by two different ways.
1. Cardinal measurement of utility.
2. Ordinal measurement of utility.

16. Mesurment Of Utility
Ordinal Mesurment of
Utility
Cardinal Mesurment
of Utility
Utility can be measfurefd by two different ways :
Cardinal Mesurment of Utility :
when the consuming level of utility or satisfaction measured in
numerical or mathematical term that is known as cardinal
measurement of utility.Such as:utility or satisfaction
determined as 1,2,3,4,5 etc.
This method was first introduced by economists Walrus
&Jarons. But it elaborately explained by neo
classicaleconomists Alfred Marshall.

17. ● According to Alfred Marshall view:’’If a consumer consumes
same commodity more than once at a certain time,then his
level of utility continuously declines.this analysis is applicable
by using cardinal utility measurement.
● We apply cardinal measurement by using the following table:

18. ● The table showed that by consuming of commodity fifth
times.Its level of utility continuously declined.
● Graphical presentation:
0
1
2
3
4
5
6
0 1 2 3 4 5 6
UTILITY
Units of Commodity

19. From the figure ”x” axis measures unit of commodity &
“y” axis measures level of utility.As consumer consume
same commodity at the fixed units,that’s why “x” axis
can be divided into same unit. Such as: 1,2,3,4,5.
From the first unit of commodity, consumer gets five
units of utility. That can be measured by point a.
After consuming 1st,2nd,3rd,4th and 5th unit of commodity,
his level of utility respectively 5,4,3,2,1 that indicated by
different points a,b,c,d,e. Now by adding up a,b,c,d,e; we
get downward slopping utility curve. As the level of
utility and unit of commodity are negatively related,
that’s why the curve is downward slopping.

20. OrdinalMeasurement of utility:
The principles of ordinal measurement represent ranking of
preference bundle of different wants depending on the level of
utility. This analysis introduced by R.J.HICKS & ALLEN. They
use indifferent curve analysis for measuring ordinal utility.
Graphical presentation:
Y2
c
b
a
o X1

21. From the figure IC1,IC2 and IC3 indicate preference bundle of
wants that ranked on the level of utility. As higher indifferent
curve shows higher level of satisfaction, so we can rearrange
the preference bundle in such a way where IC1>IC2>IC3.That
means c is more preferred than b and a. This measurement of
utility is known as ordinal measurement.
Law of Diminishing Marginal Utility:
Definition of the Law:
Other things remaining the same when a person takes
successive units of a commodity, the marginal utility
diminishes constantly.. The marginal utility of a commodity
diminishes at the consumer gets larger quantities of it.
Marginal utility is the change in the total utility resulting from
one unit change in the consumption of a commodity per unit of
time.

22. Assumptions:
Following are the assumptions of the law of diminishing marginal utility.
● The utility is measurable and a person can express the utility derived from a
commodity in qualitative terms such as 2 units, 4 units and 7 units etc.
● A rational consumer aims at the maximization of his utility.
● It is necessary that a standard unit of measurement is constant
● A commodity is being taken continuously. Any gap between the consumption of a
commodity should be suitable.
● There should be proper units of a good consumed by the consumer.
● It is assumed that various units of commodity homogeneous in characteristics.
● The taste of the consumer remains same during the consumption o the successive
units of commodity.
● Income of the consumer remains constant during the operation of the law of
diminishing marginal utility.
● It is assumed that the commodity is divisible.
● There should be not change in fashion. For example, if there is a fashion of lifted
shirts, then the consumer may have no utility in open shirts.
● It is assumed that the prices of the substitutes do not change. For example, the
demand for CNG increases due to rise in the prices of petroleum and these price
changes effect the utility of CNG.

23. Explanation With Schedule and Diagram:
We assume that a man is very thirsty. He takes the glasses of water
successively. The marginal utility of the successive glasses of water
decreases, ultimately, he reaches the point of satiety. After this point
the marginal utility becomes negative, if he is forced further to take a
glass of water. The behavior of the consumer is indicated in the
following schedule:

24. On taking the 1st glass of water, the consumer gets 10 units of
utility, because he is very thirsty. When he takes 2nd glass of water,
his marginal utility goes down to 8 units because his thirst has been
partly satisfied. This process continues until the marginal utility
drops down to zero which is the saturation point. By taking the
seventh glass of water, the marginal utility becomes negative
because the thirst of the consumer has already been fully satisfied.
The law of diminishing marginal utility can be explained by the
following diagram drawn with the help of above schedule:

25. In the above figure, the marginal utility of different glasses of water is measured on
the y-axis and the units (glasses of water) on X-axis. With the help of the schedule,
the points A, B, C, D, E, F and G are derived by the different combinations of units of
the commodity (glasses of water) and the marginal utility gained by different units
of commodity. By joining these points, we get the marginal utility curve. The
marginal utility curve has the downward negative slope. It intersects the X-axis at
the point of 6th unit of the commodity. At this point "F" the marginal utility becomes
zero. When the MU curve goes beyond this point, the MU becomes negative. So
there is an inverse functional relationship between the units of a commodity and the
marginal utility of that commodity.
Exceptions or Limitations:
The limitations or exceptions of the law of diminishing marginal utility are as
follows:
● The law does not hold well in the rare collections. For example, collection of ancient
coins, stamps etc.
● The law is not fully applicable to money. The marginal utility of money declines with
richness but never falls to zero.
● It does not apply to the knowledge, art and innovations.
● The law is not applicable for precious goods.
● Historical things are also included in exceptions to the law.
● Law does not operate if consumer behaves in irrational manner. For example,
drunkard is said to enjoy each successive peg more than the previous one.

26. ● Man is fond of beauty and decoration. He gets more satisfaction by getting
the above merits of the commodities.
● If a dress comes in fashion, its utility goes up. On the other hand its utility
goes down if it goes out of fashion.
● The utility increases due to demonstration. It is a natural element.
Importance of the Law of Diminishing Marginal
Utility:
● The importance or the role of the law of diminishing marginal utility is as
follows:
● By purchasing more of a commodity the marginal utility decreases. Due to
this behaviour, the consumer cuts his expenditures to that commodity.
● In the field of public finance, this law has a practical application, imposing a
heavier burden on the rich people.
● This law is the base of some other economic laws such as law of demand,
elasticity of demand, consumer surplus and the law of substitution etc.
● The value of commodity falls by increasing the supply of a commodity. It
forms a basis of the theory of value. In this way prices are determined